Financial Variables as Predictive Indicators of the Luxembourg GDP Growth

Abstract

The last financial crisis has had negative impacts on economic growth underlining the contagion between the financial sphere and the real sphere. Indeed, in many developed economies the aggregate production fell abruptly during the financial turbulences period. Now the problem is to understand how a financial crisis creates such a contagion. The answer may partly lie in the role of financial variables in the economic growth outlook. In this paper, we analyze the predictive power of some relevant financial variables to forecast the GDP growth in Luxembourg by implementing a Mixed Data Sampling model developed by Ghysels, Sinko, and Vuksic (2007). Both financial and non-financial variables are introduced such as stock index, monetary aggregates (M1 and M2), industrial production index (I.P.I) and mutual fund’s N.A.V. (Net Asset Value). The industrial production index (I.P.I) is used as a benchmark. According to our estimations, the stocks index and mutual funds’ N.A.V outperform the industrial production index. Considering the role of finance in Luxembourgish economic growth, this result is not surprising. M1 outperforms the I.P.I over the long-term run.